[QUOTE=Aeschines]
At some point in 1965: 874
At some point in 1981: 875
[/QUOTE]
It looks worse than it is, though, from our current perspective, since back then companies still paid worthwhile dividends. It’s likely that one’s real earnings from stock had you invested from 1965-81 would not be negative even taking into account inflation or even a bit positive due to the dividends.
[QUOTE=Ludovic]
It looks worse than it is, though, from our current perspective, since back then companies still paid worthwhile dividends. It’s likely that one’s real earnings from stock had you invested from 1965-81 would not be negative even taking into account inflation or even a bit positive due to the dividends.
[/QUOTE]
Good point about dividends. IIRC, the investment was, as you say, not negative, but still quite poor compared to bonds, or even to MMFs, CDs, or even a savings account.
Well, you can’t have any of our stuff.
[starts drawing up plans to do away with that “longest undefended frontier” thing…]
[QUOTE=js_africanus]
May personal debt and higher gas prices cause a recession? Maybe, maybe not. But we’re not looking at collapsing into reliving the 1930s. Maybe the 1970s, but even that is awfully unlikely because we know the long-term shape of the Phillips curve. Yes, there’s going to be a recession, but to claim a total collapse, we need much better evidence and analysis.
And, I for one, am looking forward to all the babyboomers retiring. It will be great for the job market, and when their housing goes up for grabs as they engage in the old-person-lifestyle-downsizing property sale, I’ll be able to buy at a good price.
[/QUOTE]
You may have hit on it. The glut of property for sale, much of which is grossly overpriced and some of which is highly leveridged, might just be the trigger. As you say, not a 1930’s depression, but recessions can be mild, medium and perhaps VERY painful.
[QUOTE=spoke-]
What am I getting wrong? Am I mistaken about any of the trends I am seeing? Am I mistaken about potential consequences? Would someone versed in economics please tell me I am mistaken, and give me a happy ending?
[/QUOTE]
It’s already been pointed out but the mistake you are making is the common mistake that the economy will continue in whatever trend it is in indefinitely.
Aeschines, what DJIA are you looking at?
Please enlighten me because I don’t understand your numbers as they relate to the Dow Jones Industrial Average
js_africanus hit on it.
Productivity’s been rising since 1997, and has been stellar since 2000, because even now the number of young folks entering the labor market isn’t equal to the over 55’s who can potentially leave whenever they feel they have enough to retire. Companies, faced with not a lot of slack in the labor market, have been having to streamline their processes and automate.
I’m 49, and I already have lots of former colleagues who are retired, and one friend of mine, after being laid off, decided he had enough to live on for the rest of his life, and has been travelling the world since. If you want to know what to invest in, my opinion is that the word is: leisure. Hotels and casinos and cruise ships and golf resorts and sporting equipment of all sorts and boats and everything like that, 'cause all those boomers who choose to retire will have money, and they’re going to spend it on having a good time.
Which explains, btw, all that immigration. Word that there’s work up here spreads, I’m sure, faster than the speed of light among poor folks south of the border.
As for house downsizing, well, this boomer’s house is already small enough. Admittedly, I can’t say that about my siblings, the bastids.
[QUOTE=pantom]
If you want to know what to invest in, my opinion is that the word is: leisure.
[/quote]
Always diversify, IMHO.
At least you can tell them your the only kid who’s legit! 
All recessions are very painful, at least to those downsized. I recall seeing somewhere figures about crime/suicide against unemployment, and they were a bit, well, depressing. I’m reminded of a New Yorker cartoon of a tycoon, referring to his wife in the background — she is pictured lounging in a state of decadence reminiscent of imperial Rome — who says something to the effect of, “I never told her about the depression, it only would have worried her.” I hope I hadn’t given the impression that I’m viewing a recession with a cavalier attitude.
In the Great Depression, three key things happened. First, the federal government cut back money supply by about 1/3. As we can well imagine, that wasn’t good for the economy. The second is related; since everybody was on the gold standard, and since gold was being hoarded by at least a few central banks, that further constricted the supply of money. The third was the protectionism that swept international trade.
In the '70s, we didn’t fully understand the Phillips curve. That’s the relationship between unemployment & inflation. We thought we could push down unemployment below its natural level, but that just meant we ratcheted up inflationary pressures a notch. The short-run Phillips curve still holds the downward sloping relationship, but that’s only the short term. The long-term version is vertical; as we push unemployment too low, the whole curve jumps up a little bit, and we actually build inflation into the economy! Hence stagflation when we learned, the hard way, about the long-run shape of the relationship. In order to get rid of the inflation we had built in, we were stuck with the stagnation we were trying to avoid. At least it broke before we got to hyperinflation, because that would have been a huge disaster.
Today we may have a housing bubble. But that’s a bubble in one market, not in the economy itself. We still enjoy an economy that’s productive, efficient, and thick with infrastructure, and we have a lot of people who are willing to turn a wrench for a living. There is a world of goods out there that need parts, and a lot of those things are made and designed in small, almost cottage-industry operations. Rather than a collapsing economy, a sufficiently severe drop in wages would signal the renaissance of blue-collar America (that’s IMHO). The über-factories of the Big-Three Automobile Age may never come back, but if our fundamental economic elements stay solid, things will ultimately be okay.
As far as fundamentals go, we’ve got the Fed, a professional, dedicated, controller of the money supply that is, by design, insulated from the politicians. We can move goods and information easily with our networks of rails, roads, and wires. We’re basically educated, if a bit stupid. We do okay, but need to improve, in keeping our borders open to trade. English is becoming the lingua franca of the world. And, if need be, we could always put a tax on gas guzzlers to drive moderate gasoline prices. And we’re still basically an optimistic, forward-looking society.
So, yeah, the babyboomers have a lot of assets that are going to go on the market, and it will be interesting to see what happens. Yes, there is a lot of personal debt, and it will be interesting to see what happens. It’s been a while since I’ve looked at the claim that once banks start calling in the debt, the whole banking system will collapse, but that’s really not the case. The basic claim behind that idea, at least the versions I’ve seen, is that it is the banks, not the Fed, that control the money supply by lending. Once the foreclosure dominos start falling, the money supply will shrink to a small fraction of what it currently is and we’re screwed. IIRC, that’s mostly based on a misunderstanding of money. In addition, the Fed does have control over the money supply and can moderate such problems.
So, sorry for beating a dead horse, but I still don’t see a cataclysmic (sp?) crash in the near future. Thanks for listening!
:smack:
Absolutely!
I do have to remember to qualify when I say stuff like this; what I meant is that you should have a bit more in leisure type companies than in others; you should overweight it, in other words.
And if that bit of Wall Street jargon is unfamiliar to you, forget I said anything. Stick with index funds.
[QUOTE=spoke]
My question is whether our banking industry might be a house of cards on the verge of collapse. I see several factors converging which cause me concern, but don’t know enough about economics to know how these things will play out…
[Lists a bunch of stuff]
What am I getting wrong? Am I mistaken about any of the trends I am seeing? Am I mistaken about potential consequences? Would someone versed in economics please tell me I am mistaken, and give me a happy ending?
[/quote]
Nothing wrong, Spoke. You’re not mistaken about the trends or the inevitable consequences. If you got kids, be ready to provide in a much rougher atmosphere. There are some people who know how to surive “on the streets” better than you, and you better believe it will turn into an all-out class warfare when this happens. Those who can’t provide (usually those on the poor sides of town) will pour into the rich sides of town, trying to steal.
This doesn’t mean everybody “over there” will going crazy and doing this, but it’ll be a misconception and will build a lot of resentment and hatred. You will need to supress these urges to lash out at the poor, since they are not all bad. You just have to understand the sort of desperation EVERYBODY will be feeling. The prudent man foreseeth the evil, and thus hides himself from it.
No peachy ending to this one, because the economy WILL collapse. What you should be worried about is the rapid climate changes. If climate change really takes off, and we can’t grow crops like we used to, how are we going to sustain our very large population? The truth is that we won’t, and it will truly be “the eeeend of the wooorld as we know it.”
A happy ending? If you live through it all, without being an asshole and having to step over other people to do it, you will be rewarded with the Kingdom of Heaven. Or so some believe… I do, but then I don’t believe I’ll be making it through this whole ordeal. Hopefully my nieces and nephews will.
Once again, define “collapse”.
We had an economic collapse just 5 years ago, when the dot com bubble burst. The stock market tanked, hundreds of thousands people (real people! Not sub-omegaloid blue collar workers!) lost their jobs, companies folded, venture capitalists lost their shirts, sock puppet mascots were auctioned on eBay.
I don’t know why people expect that the NEXT recession (which we are sure to have) is gonna be The Big One leading to Road Warrior style societal breakdown.
Really, has ANY industrialized country collapsed into Road Warrior style chaos? The biggest collapse of the 20th century was the collapse of Nazi Germany and Imperial Japan. Both countries were flattened, millions of people killed, tens of millions had their homes and work destroyed, infrastructure litterally pounded into rubble.
If Nazi Germany can pick itself up after being flattened in WWII and become a prosperous democracy after only 10-15 years of rebuilding, I suppose the United States can recover from a catastrophic economic recession.
[QUOTE=samclem]
As an example. If China decided to redeem say, 40% of the US dollars that they hold, it would probably put the value of the US dollar into free-fall against most world currencies. It would be cataclysmic.
[/QUOTE]
Why would they do this? It would decrease their holdings and destroy their major customer along with the rest of the world. There are problems, but going back to the 60’s there was always some problem that was going to ruin the economy. The debt of the U.S. is about 2% of its GNP, France (and some other EU countries) have debt over 4% and their population is getting older faster than ours, so why doesn’t anyone worry about them?
[QUOTE=samclem]
As an example. If China decided to redeem say, 40% of the US dollars that they hold, it would probably put the value of the US dollar into free-fall against most world currencies. It would be cataclysmic.
[/QUOTE]
Why would China do that when they are in near total-reliance on the US purchasing their products and utilizing their industrial services?
China torpedoing the US dollar assumes they are willing to torpedo the value of the US dollars that they hold.
Selling their US dollars will surely torpedo the value of the US dollars. Except they won’t be able to sell many at the current price…each dollar they sell makes the next dollar they try to sell worth less.
Imagine Bill Gates trying to sell his Microsoft stock. Sure, he’s got X shares, the current value is $Y/share, so if he sold he’d have $X * Y, right? But as soon as the number of shares on the market increases, the value of those shares decreases…especially once people realize that Bill Gates is dumping stock. Soon everyone wants to sell, no one wants to buy, which means the value dives.
So China can’t dump massive US dollars and get the current value for those dollars, only a discounted value. China and many other countries have a policy of setting their currency artificially low against the dollar as a protectionist measure, which makes exports from those countries cheaper and imports more expensive. So when China dumps dollars they reverse this policy, suddenly imports from China to the US are very expensive, exports from the US to China are very cheap. And, supply and demand, US exports pick up, US imports drop.
[QUOTE=Lemur866]
Imagine Bill Gates trying to sell his Microsoft stock. Sure, he’s got X shares, the current value is $Y/share, so if he sold he’d have $X * Y, right? But as soon as the number of shares on the market increases, the value of those shares decreases…especially once people realize that Bill Gates is dumping stock. Soon everyone wants to sell, no one wants to buy, which means the value dives.
[/QUOTE]
Warren Buffet is giving away 85% of Berkshire Hathaway. Does this mean that the value of Berkshire Hathaway stock will plummet? And suppose that Bill Gates instead decides to give away his Microsoft stock. Would your scenario apply in that situation?
Well, Kozmik, Buffett giving his stock away is not the same as selling it. It merely means it will be given to a charitable trust, and will be sold as needed by that trust to fund their philanthropy. Not the same thing at all, in terms of pressure on the price.
As for the dollar situation, yes it will decline sharply at some point relative to the Chinese currency. This is inevitable and baked into the cake at this point. But it’s a leap to go from this to suggesting that there will be a collapse. Lots of other things would have to happen for that to play out. (Note that the USD was cut in half in yen terms from the time of the Plaza Accord in 1985 to the crash of '87. But the crash didn’t lead to anything other than, well, the crash itself. Bad for investors at the time, not so bad for the US. Collapses don’t happen every day, you know.)
The most that can be said is, if you time it right, you’ll make a lot in dollar terms from that adjustment, which is important if you’re a US-based investor, for obvious reasons.
I don’t know what others are doing, but mrAru and I are continuing what we have always tried to do. We just finished paying off all the assorted debts generated by my 3 years of unemployment - leaving us with the mortgage, the regular bills - though I did buy a new [used] car as I have a 100 mile round trip commute daily and I need something dependable that will last me at least 5 more years. We have started rebuilding our savings - mainly out of my income since his income was just covering the expenses before I got work [the main bills ended up being for large ticket items - the fridge died and both routine building maintenance, car maintenance and a new well pump can be expensive over time.]
I am making certain that I save an equal amount of money into my savings account as my car loan and vehicle costs are, that way if my job circles the drain in 1.5 years, I will be able to pay off my car and own it outright, which will eliminate a fairly large bill I pay each month. I am also saving about $250 a month for rebuilding the savings account - we feel that we really need to have 6 months living expenses in savings to be comfortable.
We figure that as long as we can get as much paid off as possible [if we seriously put our efforts into it we could probably have the farm paid off in about 5 years as well] and organize for the future, we will manage to survive. Even the cost of heating we can handle, this past winter the only thing we used heating oil for was keeping the house over freezing and making hot water for showers - we used the wood stove for heating. In a pinch, we oculd use ‘solar shower bags’ and put water heated on the woodstove in them for showers if we really wanted to conserve.
FWIW, various pundits have been predicting the imminent collapse of the American economy for over 25 years. Flight of foreign investment in federal securities has been often cited, as has dependence on foreign oil (not yet mentioned by anyone in this thread, at least that I noticed). These scenarios ignore three things. First, as has been stated by several folks, it’s not really in the interest of those foreigners to torpedo the US economy. Second, although the US doesn’t manufacture as much as it once did, it does have a vigorous economy in many other sectors, including information, engineering, entertainment and health care. Third, the US has a huge capital base, both tangible (stuff) and intangible (knowhow). Could the US nonetheless go into a freefall depression? Theoretically possible. But I ain’t losing a lot of sleep over the possibility.
I really have nothing to add to this debate except to say; Economics makes my head hurt.